PPP (short run)

[Sanjay Sachdev]

Hi,
what are the underlying factors that leads to PPP does not hold in the short run ?

 

[ayousaf]

Essentially, PPP does not hold because of the fact that carry trades are profitable. PPP would hold (for financial assets at least) if uncovered interest parity held. However, the proliferance of carry trades implies that uncovered interest parity does NOT hold.

 

[S2000magician]

ayousaf wrote:Essentially, PPP does not hold because of the fact that carry trades are profitable.

I’m pretty sure it’s the other way round.

 

[Sanjay Sachdev]

can we say that, if uncovered interest rate parity holds..then covered interest rate parity also could have hold ?
but it’s not other way around ! plz correct me if m wrong…

 

[S2000magician]

Covered interest rate parity always holds.

 

[Sanjay Sachdev]

yup…now it make sense ! thanx

 

[S2000magician]

My pleasure.

 

[ayousaf]

Always a pleasure to be corrected by you S2000

 

[S2000magician]

ayousaf wrote:Always a pleasure to be corrected by you S2000